The Nasdaq crossed the 15,000 mark for the first time ever this past week.  The S&P 500 also hit a new high above the 4,500 mark, and the Dow is close to its all-time high above 35,000.

I believe that we are in a massive bubble in stocks, but I want to focus particularly on the Nasdaq, which has seen unprecedented gains.  The only thing comparable is the tech bubble of the late 1990s, but I believe our current situation may be worse.

There is a lot going on in the news.  While the chaotic ending of the war in Afghanistan is getting the headlines, this has very little impact on the market or the economy.  Maybe the military-industrial complex will see a small decline in profitability with one war coming to a close, but they have plenty of other fish to feed off of.  This will likely continue until Congress is forced to cut spending.

The other major headline out there now is the so-called Delta variant of COVID-19.  I have seen some days where stocks have been down, and I have seen headlines saying that stocks are down with rising concerns of the Delta variant.  But stocks just happened to be down on a particular day.

It actually makes no sense that stocks would be down in the face of rising COVID concerns.  2020 ended up being ridiculously good for stock investors.  Who would have thought that you could force people in their homes, close essential businesses, and see major industries (think cruise lines and airlines) virtually shut down, yet see a booming stock market?

The main thing that the stock bulls want is easy money.  They want artificially low interest rates from the Federal Reserve, and they want more money created out of thin air.

The Fed is currently continuing to add about $120 billion per month to its balance sheet.  There is talk of tapering this, which means adding a little less each month.  There will still be monetary inflation, but just at a slower pace.

The Previous Bubble and the New One

Let’s go back to the last really major bubble in the Nasdaq.  We are going to skip the 2008/ 2009 financial crisis, which did see a big hit to stocks.  Since 2009, stocks have been on a consistent bull run, with a minor blip in March 2020 when the world closed down.  The world was still closed down when stocks started going back up with all of the Fed easy money.

Let’s revisit what happened in the late 1990s and early 2000s, specifically with the Nasdaq.

The Nasdaq first hit 1,000 in 1995.  It went crazy over the next 5 years and touched a high just above 5,000 in early 2000.  By late 2002, the index had gone back down to a low of about 1,200, a loss of over 75%.

From its low in 2002, it slowly began to rise again.  It went above 2,700 in late 2007.  With the financial crisis, it went back down below the 1,500 mark in early 2009.

Since that time, it has gone crazy, with a few blips down, including in March 2020.

The Nasdaq has now more than doubled from early April 2020.  This is absurd.  But it is even more absurd that early April 2020 was just a little blip down.

From early 2009 to August 2021, the Nasdaq has gone up 10-fold.  Read that again.  In just over 12 years, the Nasdaq index is up 10 times what it was.

There may be some justification, as we have seen the explosion of some individual giants like Google, Facebook, and Apple.  But it is hard to imagine that a few big stocks could justify a 10-fold increase in an index over a 12-year span.

Of course, the main justification is the Fed’s balance sheet, which has seen its share of absurd “gains”.  If you go back to August 2008 and then jump forward to August 2021, it has gone up almost 10-fold as well.

This is the Fed’s balance sheet, which is really the base money.  This is not factoring in excess reserves held by banks, the speed at which money is changing hands, and the many factors that go into price inflation.  But it is still interesting that there is some correlation between the Fed’s balance sheet and the stock market.

However, I don’t think this is going to completely hold.  I don’t think the Fed is going to reduce its balance sheet in any significant way unless we see really high price inflation.  But a tapering of its asset purchases, and the possibility that monetary inflation will temporarily stop, may be enough to crash this market.

A Painful Lesson

When the stock bubble crashes, it is going to be hard.  It is conceivable that the next crash will be even bigger than the crash in 2000 to 2002 in percentage terms.  A crash of 70% or more is not out of the question in my mind.

The big problem is that we have no idea when it is going to happen.  Maybe the bubble will get even bigger over the next couple of years before crashing.  There seems to be nothing stopping it now.

While long-term yields have come down in recent months, we are not close to an inverted yield curve as we saw in 2019, which is a predictor of recessions.  Because of what happened in 2020, it is unclear if we will need an inverted yield curve again before a major crash happens.

So while I can’t predict when this bubble will bust, I can say that we are at extreme risk levels right now.  When this thing blows up, it is going to be quite devastating to a lot of people.  The all-in stock investors who are banking on a comfortable retirement are going to see their dreams shattered in a matter of months.

And here is the really big issue.  Anyone can sell at almost any time.  It’s easy to say that someone who has all of their assets in the market can just sell some of them if they see the market going down.  But most people won’t do it on time.  They won’t know when the big one is finally hitting.

We have seen some big down days in stocks.  When they pull back 5 or 10 percent over a couple of weeks, they just immediately come roaring back to hit new highs again.  Most investors are not scared right now, but now is the time that they should be.

It has been impossible for the bulls to be wrong in this market.  Almost everything goes up, and there seems to be very little downside.  The temporary downturn in March 2020 is representative of this.  I saw some bull investors buying in March 2020 with the theory that stocks always go up in the long run.  In this case, they have been right so far, as they have seen extraordinary gains.

But there is a mentality now that any time there is a pullback in stocks, it is a great time to buy the dip.  They think any pullback is temporary.  Over the last 12 years, they have been right so far.  However, most bear markets are not temporary that last only a couple of months.

So if we see a major crash of, let’s say, 80% in the Nasdaq, there are going to be people who keep buying on the way down.  These people will be shattered.

There is going to be a reversion to the mean.  It is impossible to justify a 10-fold increase in an entire index over a 12-year period.  The only way this is sustainable is if we see something close to hyperinflation, which will then be a different set of worries.

We are in an everything bubble.  It is a speculative frenzy.  This includes stocks, real estate, cryptocurrencies, and NFTs.  People are throwing money around expecting 20% profits in the matter of months or less.  This thing is going to blow up.

While the Nasdaq isn’t going to zero, it is vulnerable to a major correction.  It is going to serve a painful lesson to the millions of people out there who think that this time is different.